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| What is an adjustable rate mortgage ? |
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An ARM mortgage, as the name suggests has an
adjustable rate against which the mortgage
payments are calculated. As a result your mortgage
payments may go up or down throughout the life of
your loan. The rate against which your mortgage is
calculated is based upon a published market index
which in many cases is a One-Year treasury bond
index or our favorite the Cost Of Funds Index
(COFI). The interest rate that applies to you is the
sum of such an index and a margin which is generally
set during your loan application process. So, for
example, if the index is 7.5% and your margin is
2.5% then your rate is 10.0%. This rate is adjusted
by your mortgage lender at every pre-determined
interval which is known as the Adjustment Interval.
So, a One-year ARM is said to have an Adjustment
interval of once every year. In addition to such
periodic adjustments, it is possible that the very
first adjustment may occur earlier or later than all
the other adjustments. For instance a one-year ARM
mortgage may have the very first initial adjustment
after 2 years of your taking out the mortgage loan,
followed by an adjustment every once a year. Your
initial interest rate is determined at the beginning
of your loan process and may be different than the
sum of the current index plus margin. |
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